For many of us, the prospect of retirement brings a mix of excitement and apprehension — it’s a big life change and it requires well-thought-out financial planning. And choosing the right pension scheme is a key factor in your retirement plans.
The decision might seem daunting, but with the right approach and understanding, it can become a rewarding part of your financial strategy. If you’re wondering where to start, read on for top advice from the financial advisors here at MAP.
Understand your retirement goals
Before delving into the specifics of pension schemes, it’s important to have a clear understanding of your retirement goals. What does your ideal retirement look like? Are you aiming for early retirement, or do you plan to work as long as possible? These decisions will significantly influence your choice of pension.
Know your options
Once you have an idea of what you’d like from your retirement, familiarise yourself with the pension types available to you. In the UK, these include:
State pension
The state pension is provided by the government and is based on your National Insurance contribution history. It offers a regular income once you reach the state retirement age (66 as of the time of writing). The amount you receive depends on the number of qualifying years of National Insurance contributions or credits.
Workplace pensions
Workplace pensions are schemes provided by employers. There are two main types of these:
1. Defined benefit (DB) pensions: Often found in the public sector, these pensions promise a specific income in retirement, calculated based on factors like your salary and how long you’ve worked for your employer. The pension income is usually indexed to inflation, providing a stable income stream throughout retirement.
2. Defined contribution (DC) pensions: More common in the private sector, the retirement income from these pensions depends on the amount both you and your employer contribute, and the performance of the investments made with these contributions. The pension pot accumulated is used to provide an income in retirement, which can be less predictable than DB pensions.
Personal pensions
You also have the option to set up a personal pension. These are especially useful for self-employed individuals or those who want to supplement their workplace pension. You invest money into your personal pension, and the income at retirement depends on the investment performance. It’s also possible to access your funds when you reach 55 — 11 years earlier than the state pension age of 66.
With personal pensions, you have the flexibility to choose the provider and the level of contributions — and this is where financial advice from a professional can be invaluable. They can provide personalised guidance, tailored to your specific circumstances and retirement goals.
You may, for example, find that a self-invested personal pension (SIPP) is best for you. These pension plans give you more control over your investment choices, allowing you to invest in a broader range of assets, including individual stocks, bonds, and sometimes property. SIPPs are particularly appealing if you’re keen on tailoring your pension investments closely to your personal financial goals and risk appetite.
Evaluate your financial situation
It’s also beneficial to analyse your current financial position, including your income, expenses, debts, and existing savings. This will help you determine how much you can afford to contribute towards your pension and create a realistic plan.
Compare fees and charges
It’s essential to understand the fees associated with different pension schemes and how they can impact your retirement savings. Shop around and compare your options before committing to a pension plan.
Recognise your investment risks
Some pensions, including DC pensions and SSIPs, involve investing money — which inherently comes with risks. If you opt for one of these, consider your risk tolerance and investment horizon. It’s also worth diversifying your investments to reduce potential risk.
Start saving as early as you can
Whichever type of pension you go for, it’s always wise to start your retirement planning as early as possible. Regular contributions to a pension fund can grow substantially over time, and starting early allows you to benefit from the power of compound interest
Professional advice from MAP
The best pension plan for you should align with your retirement objectives, financial capacity, and risk tolerance, ensuring a secure and fulfilling retirement. Seeking professional advice from a financial advisor can help you make the right decision for your lifestyle and retirement plans.
The MAP team can help you navigate the complexities of pension schemes and retirement planning. Whether you’re looking for advice on the best workplace pensions for your team or you want to find the best personal pension plan, we’re on hand to support you. Get in touch to start your retirement planning journey today.
